What kind of intervention is needed for SMEs?

What kind of intervention is needed for SMEs?

JAKARTA (JP): Observers maintain that government intervention
in SMEs is needed only when it enables them to grow and compete
fairly.

"Otherwise, it's hands-off for the government," says Erna E.
Chotim of the Bandung-based Akatiga research center in SMEs,
labor and land issues. "Small and medium entrepreneurs need to
try out their initiatives."

What intervention is needed?

It is generally accepted that SMEs have a higher degree of
resilience to external shocks compared to large businesses
because of decentralized capital structure.

Is this always the case? The Indonesian traditional markets,
known locally as pasar basah (literally "wet markets") have in
the past two decades been disappearing slowly following the
emergence of modern and well-capitalized supermarkets.

The introduction of policies that were biased toward the
supermarket industry has been blamed for the demise of
traditional markets.

In terms of financing facilities, for instance, the Indonesian
government adopted a free market system in which big businesses
had better access.

The distribution system favored the supermarket because it
made purchases in bulk quantities -- this enabled it to sell
certain consumer products at lower prices.

In addition, the government provided better facilities such as
licenses to open supermarkets or malls because the owners were
usually large business groups (considered to be large taxpayers)
which had better financing capabilities.

Overall, the government's economic policy in the past has been
biased toward large conglomerates and monopolies. Contact with
the government involves bribes, causing higher costs which large
businesses can better cover," according to consumerism activist
turned minister Erna Witoelar in 1998.

However, following the economic and political upheavals of
1997-1999, a large number of supermarkets collapsed while new
small businesses opened up and entered the traditional market.

This was attributed to the fact that small businesses operated
on small capital, in contrast with the supermarket industry that
was backed up by only a few distributing conglomerates. Such
conglomerates were mostly politically well connected, but also
more sensitive to political upheavals.

On the other hand, SMEs in Indonesia face the following
obstacles that often translate into an incapability to cope with
unhealthy competition:

* A tedious bureaucracy and complicated licensing procedure --
which force small businesses to spend more money than they should
to get the licenses needed to support their operations

* A lack of financing sources

* Poor marketing skills

* A lack of raw materials

* A lack of management skills

* A lack of technology

* Poor information about local and international markets.

An understanding of those obstacles should be the guide for
governments to introduce suitable policies for SMEs. These
include regulations that enable "fair" competition-which does not
necessarily mean "identical" treatment of all.

For instance, some Indonesian local governments have attempted
to enforce shorter opening hours for the supermarkets in order to
give traditional markets a better chance to survive.

Noted economist Sri Mulyani once contended that Indonesia
needs a policy to create a supporting environment for small
business -- this include regulations that reduce transaction
costs in licensing, buying raw materials, operating businesses,
distributing products and obtaining information.

She acknowledged, however, the task posed a dilemma for the
authorities in making a satisfactory policy for all kinds of
industries. When it comes to major financial reforms such as
banking restructuring, efforts have to be made to ensure a
transparent, efficient and fair banking industry for all economic
actors including SMEs.

Another assistance that could be sought for SMEs is capital
injection. In the case where governments are unable to secure the
funding themselves, foreign aid should be sought.

The government of Japan, for example, earlier this year
reportedly planned to extend an assistance package of Rp 30
trillion through its Miyazawa Plan to help the Indonesian SMEs
survive the crisis.

Further, governments need to facilitate the building of the
infrastructure of the SMEs such as human resources development.

An unfortunate example would be Indonesian small onion farmers
in Java in the late 1990s who were given capital assistance but
not training of marketing skills. They managed to increase
production but failed to expand the market so they oversupplied
and found that prices dropped drastically.

Yet another government intervention can take the form of
assisting non-governmental organizations (NGOs) in providing
training to SME owners and workers.

The list of policies mentioned above is admittedly not
exhaustive, but it serves to emphasis the following: government
intervention is misplaced when it is biased toward large
businesses, or when it means that SMEs become unable to cope with
changes.

Government intervention is needed only when it helps SMEs
thrive in a competitive market. (swe)